FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One) Quarterly Report Pursuant to Section 13 or 15 (d) of
[X] The Securities Exchange Act of 1934
For The Quarterly Period Ended June 30, 2002
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from ____________ to ____________
Commission File Number 1-13648
BALCHEM CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 13-2578432
- ------------------------------------ ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
P.O. Box 175 Slate Hill, New York 10973
- ---------------------------------------- -----------------------
(Address of principal executive offices) (Zip Code)
845-355-5300
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Registrant's telephone number, including area code:
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
Yes [X] No [ ]
As of August 12, 2002 the registrant had 4,764,430 shares of its Common Stock,
$.06 2/3 par value, outstanding.
Item 1. Financial Statements
BALCHEM CORPORATION
Condensed Consolidated Balance Sheets
(Dollars in thousands, except per share data)
June 30,
2002 December 31,
Unaudited 2001
---------- ----
Current assets:
Cash and cash equivalents $ 2,848 $ 3,120
Accounts receivable 8,306 7,130
Inventories 5,237 5,575
Prepaid expenses 663 985
Deferred income taxes 221 214
------- -------
Total current assets 17,275 17,024
------- -------
Property, plant and equipment, net 21,175 17,904
Goodwill 6,397 6,397
Intangibles and other assets, net 2,684 3,152
------- -------
Total assets $47,531 $44,477
======= =======
See accompanying notes to condensed consolidated financial statements.
2
BALCHEM CORPORATION
Condensed Consolidated Balance Sheets, continued
(Dollars in thousands, except per share data)
June 30,
2002 December 31,
Unaudited 2001
--------- ----
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Current portion of long-term debt $ 1,745 $ 1,745
Trade accounts payable and other accrued expenses 3,316 2,885
Accrued compensation and other benefits 943 1,542
Dividends payable -- 305
Income taxes payable 236 --
-------- --------
Total current liabilities 6,240 6,477
-------- --------
Long-term debt 10,452 11,323
Deferred income taxes 462 351
Other long-term obligations 975 994
-------- --------
Total liabilities 18,129 19,145
-------- --------
Stockholders' equity:
Preferred stock, $25 par value. Authorized 2,000,000
shares; none issued and outstanding
Common stock, $.0667 par value. Authorized 10,000,000 shares; 4,903,238 shares
issued and 4,751,215 shares outstanding at June 30, 2002 and
4,903,238 shares issued and 4,699,166 shares outstanding at December 31, 2001 327 327
Additional paid-in capital 3,322 3,387
Retained earnings 27,416 23,773
Treasury stock, at cost: 152,023 and 204,072 shares at June 30, 2002 and
December 31, 2001, respectively (1,663) (2,155)
-------- --------
Total stockholders' equity 29,402 25,332
Total liabilities and stockholders' equity $ 47,531 $ 44,477
======== ========
See accompanying notes to condensed consolidated financial statements.
3
BALCHEM CORPORATION
Condensed Consolidated Statements of Earnings
(In thousands, except per share data)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Net sales $ 15,668 $ 10,189 $ 30,057 $ 18,213
Cost of sales 9,104 6,024 18,199 10,506
-------- -------- -------- --------
Gross profit 6,564 4,165 11,858 7,707
Operating expenses:
Selling expenses 1,400 1,022 2,806 2,010
Research and development expenses 515 392 1,009 778
General and administrative expenses 985 908 1,953 1,659
-------- -------- -------- --------
2,900 2,322 5,768 4,447
-------- -------- -------- --------
Earnings from operations 3,664 1,843 6,090 3,260
Other expenses (income):
Interest (income) (7) (33) (26) (81)
Interest expense 100 67 205 76
Other (income) expense - net -- -- -- (324)
-------- -------- -------- --------
Earnings before income tax expense 3,571 1,809 5,911 3,589
Income tax expense 1,366 661 2,268 1,328
-------- -------- -------- --------
Net earnings $ 2,205 $ 1,148 $ 3,643 $ 2,261
======== ======== ======== ========
Net earnings per common share - basic $ 0.46 $ 0.25 $ 0.77 $ 0.49
======== ======== ======== ========
Net earnings per common share - diluted $ 0.45 $ 0.24 $ 0.74 $ 0.47
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
4
BALCHEM CORPORATION
Condensed Consolidated Statements of Cash Flows
(In thousands)
Six Months Ended
June 30,
2002 2001
---- ----
Unaudited
Cash flows from operating activities:
Net earnings $ 3,643 $ 2,261
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization 1,375 1,072
Shares issued under employee benefit plans 143 112
Deferred income taxes 104 (57)
Provision for doubtful accounts 40
Changes in assets and liabilities net of effects of acquisition:
Accounts receivable (1,216) (891)
Inventories 338 (1,561)
Prepaid expenses 322 93
Accounts payable and accrued expenses (168) (461)
Income taxes payable 236 38
Other long-term obligations (19) (10)
-------- --------
Net cash provided by operating activities 4,798 596
-------- --------
Cash flows from investing activities:
Capital expenditures (4,306) (739)
Proceeds from sale of property, plant & equipment 209 --
Cash paid for product lines acquired -- (14,243)
Cash paid for intangibles assets acquired (81) (65)
-------- --------
Net cash used in investing activities (4,178) (15,047)
-------- --------
Cash flows from financing activities:
Proceeds from long-term debt -- 13,500
Principal payments on long-term debt (871) --
Proceeds from stock options and warrants exercised 284 205
Dividends paid (305) (277)
Purchase of treasury stock -- (26)
Other financing activities -- (89)
-------- --------
Net cash used in financing activities (892) 13,313
-------- --------
Decrease in cash and cash equivalents (272) (1,138)
Cash and cash equivalents beginning of period 3,120 3,068
-------- --------
Cash and cash equivalents end of period $ 2,848 $ 1,930
======== ========
See accompanying notes to condensed consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except per share data)
NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------
The condensed consolidated financial statements presented herein have been
prepared by the Company in accordance with the accounting policies described in
its December 31, 2001 Annual Report on Form 10-K, and should be read in
conjunction with the consolidated financial statements and notes, which appear
in that report. References in this Report to the Company mean Balchem and/or its
subsidiary BCP Ingredients, Inc., as the context requires.
In the opinion of management, the unaudited condensed consolidated financial
statements furnished in this Form 10-Q include all adjustments necessary for a
fair presentation of the financial position, results of operations and cash
flows for the interim periods presented. All such adjustments are of a normal
recurring nature. The condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and therefore do not
include some information and notes necessary to conform with annual reporting
requirements. The results of operations for the three and six months ended June
30, 2002 are not necessarily indicative of the operating results expected for
the full year.
NOTE 2 - PRIOR YEAR ACQUISITION
- -------------------------------
As previously reported in June, 2001, effective as of June 1, 2001, pursuant to
a certain Asset Purchase Agreement, dated as of May 21, 2001 (the "Asset
Purchase Agreement"), BCP Ingredients, Inc. ("Buyer"), a wholly owned subsidiary
of Balchem Corporation, acquired certain assets of DCV, Inc. and its affiliate,
DuCoa L.P. The results of operations of the product lines acquired have been
included in the accompanying consolidated financial statements of the Company
from the date of acquisition. The Asset Purchase Agreement provides for the
payment of up to an additional $2,750 based upon the sales of specified product
lines achieving certain gross margin levels (in excess of specified thresholds)
over the three year period following the closing, with no more than $1,000
payable for any particular yearly period. Such contingent consideration will be
recorded as an additional cost of the acquired product lines. No such contingent
consideration has been earned or paid as of June 30, 2002. The first period to
which such contingent consideration could be applicable is the twelve month
period ending June 30, 2002.
Pro Forma Summary of Operations
The following unaudited pro forma information has been prepared as if the
aforementioned acquisition had occurred on January 1, 2001 and does not include
cost savings expected from the transaction. In addition to including the results
of operations, the pro forma information gives effect primarily to interest on
borrowings to finance the acquisition and changes in depreciation and
amortization of tangible and intangible assets resulting from the acquisition.
6
The pro forma information presented does not purport to be indicative of the
results that actually would have been attained if the aforementioned
acquisition, and related financing transactions, had occurred at the beginning
of the periods presented and is not intended to be a projection of future
results.
- --------------------------------------------------------------------
Pro-Forma
Six Months Ended
June 30, 2001
- --------------------------------------------------------------------
Net sales $ 26,937
Net earnings 1,977
Basic EPS .43
Diluted EPS .41
- --------------------------------------------------------------------
NOTE 3 - INVENTORIES
- --------------------
Inventories at June 30, 2002 and December 31, 2001 consist of the following:
- --------------------------------------------------------------------------------
June 30, 2002 December 31, 2001
- --------------------------------------------------------------------------------
Raw materials $ 1,792 $ 2,152
Finished goods 3,445 3,423
- --------------------------------------------------------------------------------
Total inventories $ 5,237 $ 5,575
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NOTE 4 - NET EARNINGS PER SHARE
- -------------------------------
The following presents a reconciliation of the earnings and shares used in
calculating basic and diluted net earnings per share:
- -------------------------------------------------------------------------------------------------------------
Income Number of Shares Per Share
Three months ended June 30, 2002 (Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted average common
shares outstanding $2,205 4,744,512 $.46
Effect of dilutive securities - stock options 209,864
---------
Diluted EPS - Net earnings and weighted
average common shares outstanding and
effect of stock options $2,205 4,954,376 $.45
- -------------------------------------------------------------------------------------------------------------
7
- -------------------------------------------------------------------------------------------------------------
Income Number of Shares Per Share
Three months ended June 30, 2001 (Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted average common
shares outstanding $1,148 4,637,649 $.25
Effect of dilutive securities - stock options 178,150
-------
Diluted EPS - Net earnings and weighted
average common shares outstanding and
effect of stock options $1,148 4,815,799 $.24
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Income Number of Shares Per Share
Six months ended June 30, 2002 (Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted average common
shares outstanding $3,643 4,732,007 $.77
Effect of dilutive securities - stock options 204,205
---------
Diluted EPS - Net earnings and weighted
average common shares outstanding and
effect of stock options $3,643 4,936,212 $.74
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Income Number of Shares Per Share
Six months ended June 30, 2001 (Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------------------------------------
Basic EPS - Net earnings and weighted average common
shares outstanding $2,261 4,629,583 $.49
Effect of dilutive securities - stock options 166,197
---------
Diluted EPS - Net earnings and weighted
average common shares outstanding and
effect of stock options $2,261 4,795,780 $.47
- -------------------------------------------------------------------------------------------------------------
At June 30, 2002, the Company had no stock options outstanding that could
potentially dilute basic earnings per share in future periods that were not
included in diluted earnings per share because their effect on the period
presented was anti-dilutive.
NOTE 5 - SEGMENT INFORMATION
- ----------------------------
The Company's reportable segments are strategic businesses that offer products
and services to different markets. Presently, the Company has three segments,
specialty products, encapsulated / nutritional products and the unencapsulated
feed supplements segment, a result of the aforementioned acquisition of certain
assets of DCV, Inc. and its affiliate, DuCoa L.P. Products relating to choline
animal feed for non-ruminant animals are primarily reported in this segment.
Human choline nutrient products (also relating to the aforementioned
acquisition) and encapsulated products are reported in the encapsulated /
nutritional products segment.
Business Segment Net Sales:
- -------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------
Specialty Products $ 5,474 $ 5,428 $10,819 $10,610
Encapsulated/Nutritional Products 7,750 3,977 14,113 6,819
Unencapsulated Feed Supplements 2,444 784 5,125 784
- -------------------------------------------------------------------------------------------------------
Total $15,668 $10,189 $30,057 $18,213
=======================================================================================================
Business Segment Earnings (Loss):
- -------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------
Specialty Products $ 1,905 $ 1,646 $ 3,623 $ 3,127
Encapsulated/Nutritional Products 1,770 209 2,676 145
Unencapsulated Feed Supplements (11) (12) (209) (12)
Interest and other income (expense) (93) (34) (179) 329
- -------------------------------------------------------------------------------------------------------
Earnings before income taxes $ 3,571 $ 1,809 $ 5,911 $ 3,589
=====================================================================================================
NOTE 6- SUPPLEMENTAL CASH FLOW INFORMATION
- ------------------------------------------
Cash paid during the six months ended June 30, 2002 and 2001 for income taxes
and interest is as follows:
Six Months Ended
June 30,
2002 2001
- -----------------------------------------------
Income taxes $1,805 $1,338
Interest $ 205 $ 76
===============================================
NOTE 7 - COMMON STOCK
- ---------------------
In June 1999, the board of directors authorized the repurchase of up to
1,000,000 shares of the Company's outstanding common stock over a two-year
period commencing July 2, 1999. Through June 30, 2002, the Company has
repurchased 343,316 shares at an
9
average cost of $9.26 per share of which 152,023 remain in treasury at June 30,
2002. In June 2002, the board of directors authorized an extension to the stock
repurchase program for up to an additional 600,000 shares through June 30, 2003.
NOTE 8 - OTHER INCOME
- ---------------------
During the six months ended June 30, 2001, the Company received proceeds of
approximately $324 from the settlement of a class-action claim related to
vitamin product antitrust litigation.
NOTE 9 - LONG TERM DEBT
- -----------------------
On June 1, 2001, the Company and its principal bank entered into a Loan
Agreement (the "Loan Agreement") providing for a term loan of $13,500 (the "Term
Loan"), the proceeds of which were used to fund the aforementioned acquisition
of certain assets of DCV, Inc. and its affiliate Ducoa L.P. The Term Loan is
payable in equal monthly installments of principal beginning October 1, 2001 of
approximately $145, together with accrued interest, and has a maturity date of
May 31, 2009. Borrowing under the Term Loan bears interest at LIBOR plus 1.25%
(3.09% and 4.95% at June 30, 2002 and 2001, respectively). Certain provisions of
the Term Loan require maintenance of certain financial ratios, limit future
borrowings and impose certain other requirements as contained in the agreement.
At June 30, 2002, the Company was in compliance with all restrictive covenants
contained in the Loan Agreement. The Loan Agreement also provides for a
short-term revolving credit facility of $3,000 (the "Revolving Facility").
Borrowings under the Revolving Facility bear interest at LIBOR plus 1.00% (2.84%
and 4.70% at June 30, 2002 and 2001, respectively). No amounts have been drawn
on the Revolving Facility as of the date hereof. The Revolving Facility expires
on May 31, 2003. The Company intends to seek renewal of such facility.
Indebtedness under the Loan Agreement is secured by substantially all of the
assets of the Company other than real properties.
NOTE 10 - NEW ACCOUNTING PRONOUNCEMENTS
- ---------------------------------------
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. Under the provisions of
SFAS No. 142, goodwill and intangible assets with indefinite lives are not
amortized, but tested for impairment annually, or whenever there is an
impairment indicator. In addition, upon adoption of SFAS 142, all goodwill must
be assigned to reporting units for purposes of impairment testing and is no
longer subject to amortization.
The Company adopted SFAS No. 142 as of January 1, 2002. As required by SFAS 142,
the Company performed an assessment of whether there was an indication that
goodwill was impaired at the date of adoption. In connection therewith, the
Company determined that its operations consisted of three reporting units and
determined each reporting unit's
10
fair value and compared it to the reporting unit's net book value. As of June
30, 2002, the Company's reporting units' fair value exceeded their carrying
amounts, and therefore there was no indication that goodwill was impaired.
Accordingly, the Company was not required to perform any further transitional
impairment tests. The Company plans to perform its impairment test each December
31 in the future.
The Company had unamortized goodwill in the amount of $6,397 at June 30, 2002
and December 31, 2001, respectively, subject to the provisions of SFAS Nos. 141
and 142. Substantially all of the unamortized goodwill is a result of the
aforementioned June 1, 2001 acquisition of certain assets of DCV, Inc. and its
affiliate, Ducoa L.P. Such goodwill has been allocated to the Company's
reporting units as follows: Specialty Products totaling $5,118 and
Encapsulated/Nutritional Products totaling $1,279. Adoption of SFAS 142 did not
have an effect on the comparability of the first six months of 2002 operating
results when compared to the first six months of 2001 and thus no proforma
financial information is presented.
As of June 30, 2002 and December 31, 2001 the Company had identifiable
intangible assets with a gross carrying value of approximately $7,692, and
$7,930, respectively, less accumulated amortization of $5,008 and $4,778,
respectively. Intangible assets at June 30, 2002 consist of the following:
- ----------------------------------------------------------------------------------------
Gross
Amortization period Carrying Accumulated
(in years) Amount Amortization
- ----------------------------------------------------------------------------------------
Customer lists 10 $6,760 $4,628
Re-registration costs 10 356 282
Patents 17 345 81
Trademarks 17 173 10
Other 5 58 7
- ----------------------------------------------------------------------------------------
$7,692 $5,008
========================================================================================
Amortization of identifiable intangible assets was approximately $549 for the
first six months of 2002. Assuming no change in the gross carrying value of
identifiable intangible assets, the estimated amortization expense for the
twelve months ended December 31, 2002 and the next succeeding year is
approximately $1,100 per year, approximately $683 in the third succeeding year
and approximately $27 in the fourth succeeding year. At June 30, 2002, there
were no identifiable intangible assets with indefinite useful lives as defined
by SFAS No. 142. Identifiable intangible assets are reflected in "Intangibles
and other assets" in the Company's consolidated balance sheets. There were no
changes to the useful lives of intangible assets subject to amortization during
the six months ended June 30, 2002.
In August, 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. This Statement requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If the carrying
amount of an asset exceeds its estimated future cash flows, an
11
impairment charge is recognized by the amount by which the carrying amount of
the asset exceeds the fair value of the asset. SFAS No. 144 requires companies
to separately report discontinued operations and extends that reporting to a
component of an entity that either has been disposed of (by sale, abandonment,
or in a distribution to owners) or is classified as held for sale. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell. The Company adopted SFAS No. 144 on January 1, 2002 and such
adoption had no effect on the Company's consolidated financial statements for
the six months ended June 30, 2002.
12
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations (All dollar amounts in thousands)
This Report contains forward-looking statements, within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, which reflect
the Company's expectation or belief concerning future events that involve risks
and uncertainties. The actions and performance of the Company could differ
materially from what is contemplated by the forward-looking statements contained
in this Report. Factors that might cause differences from the forward-looking
statements include those referred to or identified in Item 1 of the Company's
Annual Report on Form 10-K for the year ended December 31, 2001 and other
factors that may be identified elsewhere in this Report. Reference should be
made to such factors and all forward-looking statements are qualified in their
entirety by the above cautionary statements.
The Company is engaged in the development, manufacture and marketing of
specialty performance ingredients and products for the food, feed and medical
sterilization industries. Presently, the Company has three segments, specialty
products, encapsulated / nutritional products and the unencapsulated feed
supplements segment, a result of the June 1, 2001 acquisition of certain assets
of DCV, Inc. and its affiliate, DuCoa L.P described in item 1 of this report.
Products relating to choline animal feed for non-ruminant animals are primarily
reported in this segment. Human choline nutrient products and encapsulated
products are reported in the encapsulated / nutritional products segment.
Results of Operations:
Three months ended June 30, 2002 as compared with three months ended June 30,
- -----------------------------------------------------------------------------
2001
- ----
Net sales for the three months ended June 30, 2002 were $15,668 as compared
with $10,189 for the three months ended June 30, 2001, an increase of $5,479 or
53.8%. Net sales for the specialty products segment were $5,474 for the three
months ended June 30, 2002 as compared with $5,428 for the three months ended
June 30, 2001, an increase of $46 or 0.8%. Net sales for the encapsulated /
nutritional products segment were $7,750 for the three months ended June 30,
2002 as compared with $3,977 for the three months ended June 30, 2001, an
increase of $3,773 or 94.9%. Sales of the core encapsulates business (before
giving effect to the June 1, 2001 acquisition), increased 60.8% based on growth
in the domestic food, animal nutrition and industrial application markets. When
combined with sales of human choline products (the latter product line having
been derived from the 2001 acquisition), growth of 94.9% for the entire
encapsulated/nutritional products segment was achieved. The growth in sales to
the domestic food market is principally the result of increased volumes sold
which can be attributed principally to new products and new applications to both
existing and new customers. Sales of Reashure(TM) continued to strengthen
through growth from existing customers and from the addition of new customers
and added distribution channels globally. Net sales of $2,444 were realized in
the unencapsulated feed supplements segment, which markets
13
choline additives for the poultry and swine industries as well as industrial
choline derivative products.
Gross margin percentage for the three months ended June 30, 2002 was 41.9%
as compared to 40.9% for the three months ended June 30, 2001. Margins in the
encapsulated / nutritional products segment were favorably affected by increased
production and the mix of products sold. Margins for the specialty products
segment were favorably affected by increased production volumes of the Company's
products utilizing ethylene oxide in their respective production processes.
Margins were unfavorably affected by increased sales of lower margin feed
products to the poultry and swine markets in the unencapsulated feed supplements
segment.
Operating expenses for the three months ended June 30, 2002 increased to
$2,900 from $2,322 for the three months ended June 30, 2001, an increase of $578
or 24.9%. However, total operating expenses as a percentage of sales were 18.5%
for the three months ended June 30, 2002 as compared to 22.8% for the three
months ended June 30, 2001. The increase in operating expenses was primarily the
result of increased advertising expense and increased personnel in the area of
sales and marketing, and research for the encapsulated / nutritional products
segment . Total payroll expenses related to these and other administrative areas
increased approximately $168 for the three months ended June 30, 2002 as
compared to the three months ended June 30, 2001. In particular, additional
sales personnel were added to support the animal nutrition business and
additional selling expenses were incurred as a result of the June 1, 2001
acquisition. During the three months ended June 30, 2002 and the three months
ended June 30, 2001, the Company spent $515 and $392, respectively, on
Company-sponsored research and development programs, substantially all of which
pertained to the Company's encapsulated / nutritional products segment for both
food and animal feed applications. General and administrative expenses increased
primarily due to an increase in professional fees.
As a result of the foregoing, earnings from operations for the three months
ended June 30, 2002 were $3,664 as compared to $1,843 for the three months ended
June 30, 2001. Earnings from operations for the specialty products segment for
the three months ended June 30, 2002 were $1,905 as compared to $1,646 for the
three months ended June 30, 2001. Earnings from operations for the encapsulated
/ nutritional products segment for the three months ended June 30, 2002 were
$1,770 as compared to $209 for the three months ended June 30, 2001. The
unencapsulated feed supplements segment incurred a loss from operations for the
three months ended June 30, 2002 of $11 as compared to $12 for the three months
ended June 30, 2001.
Interest income for the three months ended June 30, 2002 totaled $7 as
compared to $33 for the three months ended June 30, 2001. Interest expense for
the three months ended June 30, 2002 totaled $100 as compared to $67 for the
three months ended June 30, 2001, an increase of $33.
The Company records its interim tax provision based upon its estimated
effective tax rate for the year, which is presently expected to be approximately
38.4%. The increased rate was primarily due to additional state tax associated
with the June 1, 2001 acquisition of certain assets of DCV, Inc. and its
affiliate, DuCoa L.P.
14
As a result of the foregoing, net earnings were $2,205 for the three months
ended June 30, 2002 as compared with $1,148 for the three months ended June 30,
2001.
Six months ended June 30, 2002 as compared with six months ended June 30, 2001
- ------------------------------------------------------------------------------
Net sales for the six months ended June 30, 2002 were $30,057 as compared
with $18,213 for the six months ended June 30, 2001, an increase of $11,844 or
65.0%. Net sales for the specialty products segment were $10,819 for the six
months ended June 30, 2002 as compared with $10,610 for the six months ended
June 30, 2001, an increase of $209 or 2.0%. Net sales for the encapsulated /
nutritional products segment were $14,113 for the six months ended June 30, 2002
as compared with $6,819 for the six months ended June 30, 2001, an increase of
$7,294 or 107.0%. Sales of the core encapsulates business (before giving effect
to the June 1, 2001 acquisition), increased 65.1% based on growth in the
domestic food, animal nutrition and industrial application markets. When
combined with sales of human choline products (the latter product line having
been derived from the 2001 acquisition), growth of 107.0% for the entire
encapsulated/nutritional products segment was achieved. The growth in sales to
the domestic food market is principally the result of increased volumes sold
which can be attributed principally to new products and new applications to both
existing and new customers. Sales of Reashure(TM) continued to strengthen
through growth from existing customers and from the addition of new customers
and added distribution channels globally. Net sales of $5,125 were realized in
the unencapsulated feed supplements segment, which markets choline additives for
the poultry and swine industries as well as industrial choline derivative
products.
Gross margin percentage for the six months ended June 30, 2002 was 39.5% as
compared to 42.3% for the six months ended June 30, 2001. Margins were
unfavorably affected principally by increased sales of lower margin feed
products to the poultry and swine markets in the unencapsulated feed supplements
segment. Margins in the encapsulated / nutritional products segment were
favorably affected by increased production and the mix of products sold. Margins
for the specialty products segment were favorably affected by increased
production volumes of the Company's products utilizing ethylene oxide in their
respective production processes.
Operating expenses for the six months ended June 30, 2002 increased to
$5,768 from $4,447 for the six months ended June 30, 2001, an increase of $1,321
or 29.7%. However, total operating expenses as a percentage of sales were 19.2%
for the six months ended June 30, 2002 as compared to 24.4% for the six months
ended June 30, 2001. The increase in operating expenses was primarily the result
of increased advertising expense and increased personnel in the area of sales
and marketing, for the encapsulated / nutritional products segment. Total
payroll expenses related to these and other administrative areas increased
approximately $621 for the six months ended June 30, 2002 as compared to the six
months ended June 30, 2001. In particular, additional sales personnel were added
to support the animal nutrition business, additional research and application
personnel have been added to support a more expansive research and development
program for both human and animal markets and additional selling expenses were
incurred as a result of the June 1, 2001 acquisition. During the six months
ended June 30, 2002 and the six months ended June 30, 2001, the Company spent
$1,009
15
and $778, respectively, on Company-sponsored research and development programs,
substantially all of which pertained to the Company's encapsulated / nutritional
products segment for both food and animal feed applications. General and
administrative expenses increased primarily due to an increase in payroll
related costs associated with the addition of support personnel and an increase
in professional fees.
As a result of the foregoing, earnings from operations for the six months
ended June 30, 2002 were $6,090 as compared to $3,260 for the six months ended
June 30, 2001. Earnings from operations for the specialty products segment for
the six months ended June 30, 2002 were $3,623 as compared to $3,127 for the six
months ended June 30, 2001. Earnings from operations for the encapsulated /
nutritional products segment for the six months ended June 30, 2002 were $2,676
as compared to $145 for the six months ended June 30, 2001. The unencapsulated
feed supplements segment incurred a loss from operations for the six months
ended June 30, 2002 of $209 as compared to $12 for the six months ended June 30,
2001.
Interest income for the six months ended June 30, 2002 totaled $26 as
compared to $81 for the six months ended June 30, 2001. Interest expense for the
six months ended June 30, 2002 totaled $205 as compared to $76 for the six
months ended June 30, 2001, an increase of $129.
The Company records its interim tax provision based upon its estimated
effective tax rate for the year, which is presently expected to be approximately
38.4%.
As a result of the foregoing, net earnings were $3,643 for the six months
ended June 30, 2002 as compared with $2,261 for the six months ended June 30,
2001.
Liquidity and Capital Resources
Working capital amounted to $11,035 at June 30, 2002 as compared to $10,547
at December 31, 2001, an increase of $488. Cash flows from operating activities
provided $4,798 for the six months ended June 30, 2002 as compared with $596 for
the six months ended June 30, 2001. The increase in cash flows from operating
activities was due primarily to increases in net earnings, depreciation, prepaid
expenses, income taxes payable and a reduction in inventory. The foregoing was
partially offset by an increase in accounts receivable and a decrease in
accounts payable and accrued expenses.
Capital expenditures were $4,306 for the six months ended June 30, 2002.
Capital expenditures are projected to be approximately $8,000 for all of
calendar year 2002. The Company is in the process of expanding the
manufacturing, processing and distribution facilities at its recently acquired
Verona, Missouri facility to enable it to handle operations for its specialty
products and encapsulated choline products businesses. In addition, the Company
has entered into a ten (10) year lease for approximately 20,000 square feet of
office space. Following completion of construction, the office space is expected
to serve as the Company's general offices and as a laboratory facility. The
costs of certain leasehold improvements to the Company's office space, up to
$630, are to be funded by the landlord.
16
In June 1999, the board of directors authorized the repurchase of up to
1,000,000 shares of the Company's outstanding common stock over a two-year
period commencing July 2, 1999. As of June 30, 2002, 343,316 shares had been
repurchased under the program at a total cost of $3,179 of which 191,293 shares
have been issued by the Company under employee benefit plans and for the
exercise of stock options. In June 2002, the board of directors authorized an
extension to the stock repurchase program for up to an additional 600,000 shares
through June 30, 2003. The Company intends to acquire shares from time to time
at prevailing market prices if and to the extent it deems it advisable to do so
based among other factors on its assessment of corporate cash flow and market
conditions.
On June 1, 2001, the Company and its principal bank entered into a Loan
Agreement (the "Loan Agreement") providing for a term loan of $13,500 (the "Term
Loan"), the proceeds of which were used to fund the aforementioned acquisition
of certain assets of DCV, Inc. and its affiliate Ducoa L.P. The Term Loan is
payable in equal monthly installments of principal beginning October 1, 2001 of
approximately $145, together with accrued interest, and has a maturity date of
May 31, 2009. Borrowing under the Term Loan bears interest at LIBOR plus 1.25%
(3.09% and 4.95% at June 30, 2002 and 2001, respectively). Certain provisions of
the term loan require maintenance of certain financial ratios, limit future
borrowings and impose certain other requirements as contained in the agreement.
At June 30, 2002, the Company was in compliance with all restrictive covenants
contained in the Loan Agreement. The Loan Agreement also provides for a
short-term revolving credit facility of $3,000 (the "Revolving Facility").
Borrowings under the Revolving Facility bear interest at LIBOR plus 1.00% (2.84%
and 4.70% at June 30, 2002 and 2001, respectively). No amounts have been drawn
on the Revolving Facility as of the date hereof. The revolving credit facility
expires on May 31, 2003. The Company intends to seek renewal of such facility.
Indebtedness under the Loan Agreement is secured by substantially all of
the assets of the Company other than real properties.
As part of the June 1, 2001 acquisition of certain assets relating to the
choline animal feed, human choline nutrient, and encapsulated product lines of
DCV, Inc. and its affiliate, DuCoa L.P., the asset purchase agreement calls for
the payment of up to an additional $2,750 based upon the sales of specified
product lines achieving certain gross margin levels (in excess of specified
thresholds) over the three year period following the closing, with no more than
$1,000 payable for any particular yearly period. No such contingent
consideration has been earned or paid as of June 30, 2002. The first period to
which such contingent consideration could be applicable is the twelve month
period ending June 30, 2002.
The Company also currently provides postretirement benefits in the form of
a retirement medical plan under a collective bargaining agreement covering
eligible retired employees of the Verona facility. The amount recorded on the
Company's balance sheet as of June 30, 2002 for this obligation is $861. The
postretirement plan is not funded.
The Company's aggregate commitments under its Loan Agreement and
noncancelable operating lease agreements (including the office space lease
entered into in 2002 as described above) as of June 30, 2002 are as follows:
17
- ---------------------------------------------------------------------------------------
Loan Operating Total
Agreement Leases Commitment
- ---------------------------------------------------------------------------------------
2002 (balance of year) $1,307 $ 292 $1,599
2003 1,742 392 2,134
2004 1,742 319 2,061
2005 1,742 245 1,987
2006 1,742 245 1,987
Thereafter 4,355 852 5,207
=======================================================================================
The Company knows of no current or pending demands on or commitments for
its liquid assets that will materially affect its liquidity.
The Company expects its operations to continue generating sufficient cash
flow to fund working capital requirements, necessary capital investments and the
current portion of debt obligations; however, the Company would seek further
bank loans or access to financial markets to fund operations, working capital,
necessary capital investments or other cash requirements should it deem it
necessary to do so.
Recently Issued Statements of Financial Accounting Standards
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations ("SFAS No. 143"). SFAS No. 143 requires the Company to record the
fair value of an asset retirement obligation as a liability in the period in
which it incurs a legal obligation associated with the retirement of tangible
long-lived assets that result from the acquisition, construction, development
and/or normal use of the assets. The Company also records a corresponding asset
which is depreciated over the life of the asset. Subsequent to the initial
measurement of the asset retirement obligation, the obligation will be adjusted
at the end of each period to reflect the passage of time and changes in the
estimated future cash flows underlying the obligation. The Company is required
to adopt SFAS No. 143 on January 1, 2003.
In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and
64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS 145")
was issued. SFAS 145 rescinds SFAS 4 and 64, which required gains and losses
from extinguishment of debt to be classified as extraordinary items. SFAS also
rescinds SFAS 44 since the provisions of the Motor Carrier Act of 1980 are
complete. SFAS 145 also amends SFAS 13 eliminating inconsistencies in certain
sale-leaseback transactions. The provisions of SFAS 145 are effective for fiscal
years beginning after May 15, 2002. Any gain or loss on extinguishment of debt
that was classified as an extraordinary item in prior periods presented shall be
reclassified. The Company does not expect that the adoption of SFAS 145 will
have a material effect on the Company's financial position or results of
operations.
In July 2002, the FASB issued Statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (FAS 146) and nullifies EITF Issue
No. 94-3. FAS 146 requires that a liability for a cost associated with an exit
or disposal activity be recognized when the liability is incurred, whereas EITF
No 94-3 had recognized the liability at the commitment date to an exit plan. The
Company is required to adopt the
18
provisions of FAS 146 effective for exit or disposal activities initiated after
December 31, 2002. This statement has no effect on the Company as it is now
constituted.
Critical Accounting Policies
The Securities and Exchange Commission ("SEC") recently issued disclosure
guidance for "critical accounting policies." The SEC defines "critical
accounting policies" as those that require application of management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and may
change in subsequent periods.
The Company's significant accounting policies are described in Note 1 of
the December 31, 2001 Annual Report on Form 10-K. There were no changes to the
Company's critical accounting policies during the six-months ended June 30,
2002. Not all of these significant accounting policies require management to
make difficult, subjective or complex judgments or estimates. However, the
following policies could be deemed to be critical within the SEC definition.
Management of the Company is required to make certain estimates and
assumptions during the preparation of consolidated financial statements in
accordance with accounting principles generally accepted in the United States of
America. These estimates and assumptions impact the reported amount of assets
and liabilities and disclosures of contingent assets and liabilities as of the
date of the consolidated financial statements. Estimates and assumptions are
reviewed periodically and the effects of revisions are reflected in the
consolidated financial statements in the period they are determined to be
necessary. Actual results could differ from those estimates.
Significant estimates underlying the accompanying consolidated financial
statements include inventory valuation, allowance for doubtful accounts, useful
lives of tangible and intangibles assets and various other operating allowances
and accruals.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
In the normal course of operations, the Company is exposed to market risks
arising from adverse changes in interest rates. Market risk is defined for these
purposes as the potential change in the fair value of debt instruments resulting
from an adverse movement in interest rates. As of June 30, 2002, the Company's
only outstanding borrowings were under a bank term loan, which bears interest at
LIBOR plus 1.25%. A 100 basis point increase in interest rates, applied to the
Company's borrowings at June 30, 2002, would result in an increase in annual
interest expense and a corresponding reduction in cash flow of approximately
$122. The Company believes that its exposure to market risk relating to interest
rate risk is not material.
The Company has no derivative financial instruments or derivative commodity
instruments, nor does the Company have any financial instruments entered into
for trading or hedging purposes. Foreign sales are generally billed in U.S.
dollars. The
19
Company believes that its business operations are not exposed in any material
respect to market risk relating to foreign currency exchange risk or commodity
price risk.
20
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
Exhibit 4.1.1 Amendment to Agreements No.3, dated as of May
23, 2002, relating to Loan Agreement dated June 1, 2001 by and
between Fleet National Bank and Balchem Corporation.
(b) Reports on Form 8-K
-------------------
No Reports on Form 8-K were filed during the quarter ended
June 30, 2002.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BALCHEM CORPORATION
-------------------
By: /s/ Dino A. Rossi
---------------------------
Dino A. Rossi, President,
Chief Executive Officer and
Principal Financial Officer
Date: August 14, 2002
22
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Balchem Corporation (the "Company")
on Form 10-Q for the period ended June 30, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Dino A. Rossi, Chief
Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350,
as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to
the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Company.
/s/ Dino A. Rossi
- -----------------
Dino A. Rossi
Chief Executive Officer
August 14, 2002
This certification accompanies the above-described Report on Form 10-Q pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the
extent required by such Act, be deemed filed by the Company for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Balchem Corporation (the "Company")
on Form 10-Q for the period ended June 30, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Francis J.
Fitzpatrick, Corporate Controller of the Company, certify, pursuant to 18 U.S.C.
section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of
2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Company.
/s/ Francis J. Fitzpatrick
- ---------------------------
Francis J. Fitzpatrick
Corporate Controller
August 14, 2002
This certification accompanies the above-described Report on Form 10-Q pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the
extent required by such Act, be deemed filed by the Company for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
4.1.1 Amendment to Agreement No. 3, dated as of the above-described
May 23, 2002, relating to Loan Agreement dated June 1, 2001 by
and between Fleet National Bank and Balchem Corporation.